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Over the last decade, the use of Bitcoin and other forms of virtual currency has grown more and more mainstream. Some investors have begun to trade in virtual currency like stocks. Others are wary of this new financial technology, wondering what the long-term ramifications of an investment will be. Many tentative investors have questions about their potential tax liability for buying and trading Bitcoin.
At the Tax Law Office of David W. Klasing, our San Diego Bitcoin and virtual currency tax attorneys and CPAs have been advising clients on issues related to virtual currency tax law for several years. We have successfully assisted many clients in keeping records and filing accurate returns related to virtual currency transactions. We have also fought for those alleged to have failed to pay taxes on virtual currency and brought their cases to successful civil conclusions. To schedule a confidential consultation, call us today at (800) 681-1295.
What if I Received a Letter from the IRS About My Unreported Cryptocurrency Transactions?
This can very easily result in an eggshell audit or criminal tax investigation if not handled properly. Many cryptocurrency traders are shocked to learn that their exchanges of one type of crypto for another were taxable in the year of the exchange. With the huge rise in the market in 2017 followed by the collapse of the market in 2018 and beyond many investors are finding themselves with huge tax liabilities without the value in their remaining portfolio to cover the taxes owed. Many traders are shocked to learn that the IRS may have obtained their information from a John Doe summons of Coinbase or another cryptocurrency brokerage. We have extensive experience in dealing with all facets of crypto including airdrops. Keeping your cryptocurrency offshore creates tremendously more exposure. Lastly, we are very accustomed to investors that had crypto with a brokerage that folded or was shut down and the complications that causes.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-reported cryptocurrency transactions) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
A letter from the IRS regarding unreported cryptocurrency does not automatically make a voluntary disclosure unavailable.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one-stop-shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!See our Non-Filer Q and A Library See our 2011 OVDI Q and A Library See our FBAR Compliance and Disclosure Q and A Library See our Foreign Audit Q and A Library
What Is Bitcoin?
Invented in 2009, Bitcoin is a digital, decentralized form of currency. It is considered decentralized because transactions involving bitcoins do not have to go through a central financial institution like a bank. Rather, transfers are made between the digital wallets found on users’ computers or phones. This makes transactions involving Bitcoin more private and should make them cheaper, considering that you will not have to pay banking or transaction fees.
The actual “bitcoin” itself is just a piece of computer code stored in a secure file. This file is kept in your digital wallet. The transaction process is powered by an open-source code known as blockchain. Each transaction involving the bitcoin becomes an individual “block” attached to the “chain” of the code. The blockchain serves as a public, permanent record of all transactions involving an individual bitcoin, without compromising anyone’s anonymity.
An artificial scarcity was designed into the model of bitcoin from the start by capping the number of bitcoins that can be “mined” at 21 million. Mining is the computer-based process by which bitcoins are produced. Currently, over 15 million bitcoins have been mined. Once that number reaches 21 million, no further bitcoins will be produced. As such, the value of a single bitcoin at any given time depends on the availability of other bitcoins in the market. Much like with a stock, the price rises and falls with supply and demand.
Following the success of Bitcoin, many other digital currencies have appeared on the market. The value of each of these types of virtual currency is assessed by online exchanges, and value can vary depending on which exchange you consult. Commonly, different types of virtual currencies are traded for one another. Many companies have also begun to accept virtual currencies as payment for goods and services. Some companies even use Bitcoin as part of their payroll.
How to Report Buying and Selling Virtual Currencies on Your Tax Return
Although using virtual currencies can save you money on bank and transaction fees, it does not get you out of dealing with the IRS. As the use of virtual currencies has risen, so have the enforcement efforts by IRS officers keen to ensure all transactions involving these currencies are properly reported. The IRS has issued guidelines that classify virtual currency as a “digital representation of value” that is not used as the legal tender of any nation. For tax purposes, virtual currencies are classified as property, like real estate or stocks, rather than currency.
This means that buying and selling Bitcoin and other virtual currency is subject to the capital gains tax. Although purchasing Bitcoin is not a taxable event, selling it or using it to purchase something is. This means that you must keep careful records of the fair market value of an individual bitcoin in U.S dollars on the day you purchase each bitcoin. To calculate the capital gains that you need to report on Schedule D of your tax return, you will subtract that number from the amount for which you sold the bitcoin.
The tax assessed on your capital gains will depend on how long you have possessed the bitcoin before selling it. If you held the bitcoin for less than a year before selling, you will be assessed a short-term capital gains tax equal to your income tax rate. If you held the bitcoin for a year or more before selling, you will be assessed a long-term capital gains tax of up to 20% + 3.8% net investment tax, depending upon your income bracket. You must also report capital losses on your return and can sometimes write these off. An experienced virtual currency tax law attorney like those at the Tax Law Offices of David W. Klasing can help you make proper reports and pay no more than what you owe.
What If I Am Paid for My Services in Virtual Currency?
While it is still a rare occurrence, in certain cases some individuals and companies have begun to pay employees and independent contractors using Bitcoin. Bitcoin paid for services is classified as ordinary income subject to self-employment tax and is not initially taxed as property. For independent contractors, you will likely be subject to self-employment taxes at the fair market value conversion rate on the date of the payment. For more complex situations like these, it is best to contact a skilled tax attorney like those at the Tax Law Offices of David W. Klasing.
If You Have Questions About Taxes on Virtual Currency, Call Our San Diego Tax Lawyers Today
Issues surrounding the taxation of virtual currency can be tricky to navigate without the assistance of a professional. At the Tax Law Office of David W. Klasing, we have both lawyers and CPAs experienced in the new frontier of virtual currency tax law. This has allowed us to help our clients with the extensive record-keeping necessary to properly report this information on their taxes and to also advise them of the eventual tax consequences of each investment. For clients who are in trouble with the IRS, we will fight to mitigate any damage and to bring your case to a successful resolution. Call us today at to schedule a confidential consultation (800) 681-1295.See our Bitcoin and Cryptocurrency Q and A Library
More Questions and Answers About Bitcoin
- What to Do When IRS Wants My Bitcoin Trade History
- Bitcoin Tax Record Keeping
- Can I Appeal a Bitcoin Tax Determination by the IRS?
- Why does BitCoin and other types of Virtual Currency draw so much attention from the Taxing Authorities and the Federal Government?
- Where is the most current IRS guidance on Virtual Currency found?
- Should You Report Bitcoin on Your Taxes?
- What Is Bitcoin?
- How does the IRS treat Bitcoin?
- Can I Face Tax Penalties for Mistakes Made with Bitcoin?
- How Does a Business Determine Its Taxes When Paid in Bitcoin?
- Who Pays the Taxes in a Bitcoin “Mining Pool?”
- Are Bitcoin Miners Required to Pay Self-Employment Tax?
- Can Bitcoin Trading Create an Obligation to Pay Capital Gains Taxes?
- What Is Bitcoin Digital Currency and Why Does it Matter for Tax Purposes?
- What Happens if the IRS Thinks I’m Using Bitcoin to Commit Tax Evasion?
Regardless of your business needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
In addition to our main office in Irvine, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad and Sacramento. During the COVID-19 pandemic, our staff are working from home, but have full virtual meeting capability.
Our office technology allows clients to meet virtually via GoToMeeting. With end-to-end encryption, strong passwords, and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client.
